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Incentive-compatible unemployment reinsurance for the euro area

Author

Listed:
  • Alexander Karaivanov
  • Benoit Mojon
  • Luiz Awazu Pereira da Silva
  • Albert Pierres Tejada
  • Robert M Townsend

Abstract

We model a reinsurance mechanism for the national unemployment insurance programs of euro area member states. The proposed risk-sharing scheme is designed to smooth country-level unemployment risk and expenditures around each country's median level, so that participation and contributions remain incentive-compatible at all times and there are no redistributionary transfers across countries. We show that, relative to the status quo, such scheme would have provided nearly perfect insurance of the euro area member states' unemployment expenditures risk in the aftermath of the 2009 sovereign debt crisis if allowed to borrow up to 2 percent of the euro area GDP. Limiting, or not allowing borrowing by the scheme would have still provided significant smoothing of surpluses and deficits in the national unemployment insurance programs over the period 2000-2019.

Suggested Citation

  • Alexander Karaivanov & Benoit Mojon & Luiz Awazu Pereira da Silva & Albert Pierres Tejada & Robert M Townsend, 2024. "Incentive-compatible unemployment reinsurance for the euro area," BIS Working Papers 1180, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:1180
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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